There are plenty of perks that come with owning a home, such as the potential to build equity and being able to make the place your own. However, one major advantage of homeownership is it can offer a range of significant tax benefits. Up to certain limits, you’re able to receive tax deductions for mortgage interest, qualifying home improvements, property taxes, and other expenses.
So, whether you’ve just bought your first home, or you own multiple homes in Los Angeles or San Antonio or both, you may be able to benefit from a variety of deductions this tax season. In order to receive these homeowner tax deductions, you’ll have to itemize deductions instead of taking the standard deduction. As a rule of thumb, you’ll want to itemize if the total amount of homeowner tax deductions, as well as any other deductions you qualify for, is greater than the standard deduction.
Taxes can be complicated and tricky, especially if you’re a new homeowner and aren’t familiar with the various homeowner tax benefits. That’s why you should consult with a tax professional to help determine which type of deduction makes financial sense for you.
If you plan to itemize, consider the following tax deductions for homeowners:
1. Mortgage interest
Deducting mortgage interest is something most homeowners look forward to during tax season. This includes any interest you pay on a loan secured by your primary or secondary home (not including investment properties). Here’s how to qualify:
- If your mortgage or home equity line of credit (HELOC) is dated before December 15, 2017, you can deduct interest on up to $1 million of the mortgage (or $500,000 if you are married but filing separately).
- For mortgages and HELOCs dated after December 15, 2017, you can deduct interest on up to $750,000 of the mortgage (or $375,000 if you are married but filing separately).
- Interest on home equity loans or lines of credit is deductible only if it was used to buy, build, or substantially improve the home that secures the loan.
2. Property taxes
As a homeowner, you may be able to claim property taxes on your tax return this year. You can deduct up to $10,000 of state and local income taxes, including property taxes paid on your primary home, or any other real estate you own. If you’re married but filing separately, you can deduct up to $5,000.
3. Real estate property taxes paid at settlement or closing
When you close on your home purchase, the property’s real estate taxes are divided, so buyers and sellers each pay taxes for the part of the property tax year they owned the home. So, if you bought a home last year, these taxes would be deductible for the 2019 tax year.
4. Home improvement tax deductions
Generally, home improvement projects aren’t considered tax-deductible. So don’t expect to receive a refund for your new, beautiful patio or decked-out man cave. However, here are two types of home improvements that may qualify for a tax deduction:
- If you made medically-necessary improvements to your home, such as installing a wheelchair ramp or making modifications to a bathroom shower due to an illness or medical reason, you can deduct these improvements as a medical expense.
- If you made improvements to your home’s energy efficiency in 2019, you are eligible for a 30% tax credit. For example, if you spend $10,000 to purchase and install solar panels, you can claim a $3,000 credit in that year. However, for 2020 the tax credit has changed to 26% and will decrease to 22% in 2021.
5. Moving expenses for active-duty military
Active-duty military personnel can deduct certain un-reimbursed moving expenses incurred if the move was a permanent change of station (PCS), according to the IRS. Unreimbursed expenses that are considered deductible include:
- Transporting all belongings to a new permanent location, such as using a moving company or renting a trailer to haul items.
- Travel expenses incurred along the way to the new residence, including lodging and airfare. Expenses for meals while traveling aren’t considered deductible.
- Storage and insurance of belongings for up to 30 consecutive days after the day that they’ve been moved from your old residence and before they have arrived at your new residence.
6. Mortgage “points”
Points are charges paid by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. You can claim points as a tax deduction.
When deducting points you must deduct the points over the term of the mortgage. You can, however, deduct the full amount of points in the year you paid them if you meet all the following guidelines:
- Your main home secures your loan.
- Paying points is an established business practice by lenders where you live.
- The points paid weren’t more than the points generally charged in that area.
- You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them (most individuals use this method).
- The points weren’t paid in place of other fees such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
- The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided aren’t required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You can’t have borrowed these funds.
- You use your loan to buy or build your main home.
- The points were calculated as a percentage of the principal amount of the mortgage.
- The amount is clearly shown on the HUD-1 purchase settlement statement as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s funds.
7. Home improvement loan
If you get a home improvement loan for your primary residence and have to pay points, you can fully deduct the points if you meet the guidelines discussed in #6.
8. Refinanced loan
If you refinance your mortgage loan and use some of the money to improve your principal residence, plus you meet the guidelines listed in #6 above, you can deduct the portion of the points related to the improvement in the year you paid for the improvements. You can deduct the rest of the points over the life of the loan.
More complex tax deductions for mortgage interest:
9. Prepaid interest
Did you pay interest in advance during the purchase process? If you paid a higher amount than necessary for that year, you can’t claim it all upfront. You need to spread this interest over the tax years to which it applies. Generally, you can only deduct the interest from that tax year.
10. Mortgage interest paid at settlement or closing
Your settlement or closing statement may include a line item for home mortgage interest. You can deduct the interest that you pay at settlement. This amount should be included in the mortgage interest statement provided by your lender.
11. Late payment charge on a mortgage payment
While you can’t deduct a late payment charge if you failed to make your mortgage payment on time, you may be able to deduct a late payment charge as “home mortgage interest” if the fee is not for a specific service in connection with your mortgage loan. One example of such a lender-provided service would be the completion of a home assessment or another similar service.
12. Mortgage prepayment penalty
Some mortgage agreements include a penalty for paying off the mortgage ahead of schedule. Once again if the penalty isn’t for a specific service or cost incurred in connection with your mortgage loan, you can deduct that penalty as home mortgage interest.
13. Mortgage interest credit
The mortgage interest credit is intended to help lower-income individuals afford homeownership. If you qualify, you can claim the credit each year for a portion of your mortgage interest.
14. Private mortgage insurance (PMI)
If your mortgage includes PMI – because your down payment on the home purchase was less than 20% – you might be able to deduct the PMI. Depending on your loan type, there are other fees similar to PMI that can be a deduction. A loan through the Veterans Administration has a funding fee. A loan through the Rural Housing Administration has a guarantee fee. These can be deducted in the year they were issued.
There are, however, limitations to PMI tax deductions. You must allocate your PMI deductions over the term of the mortgage or 84 months, whichever time is shortest. These limitations do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.